Which Mortgage Is Right for You in 2025? Find Out Now
April 15, 2025
6 minutes
Fannie Mae's latest reports predict mortgage rates will reach 6.5% by the end of 2025, with a slight decrease to 6.3% in 2026. Mortgage rates remain high but are stabilizing. If you are in the market to buy a house, locking in a fixed rate could protect you from future increases.
But which mortgage is best for you? The answer depends on your financial situation, future goals, and property type. Let’s break it down:
What Are Mortgage Loans?
A mortgage is a type of loan used to buy property. It is the agreement between you and the lender. You repay the borrowed amount with interest, and the lender retains the right to the property if you fail to repay.
Mortgage Loans vs. Housing Loans
Mortgage loans can be used for any real estate property, including residential and commercial properties. Housing loans are specifically designed for only residential properties.
How Loan Terms Affect the Cost of Credit
You can either opt for a long-term or short-term loan. Long-term loans allow for lower monthly expenses but you pay a big interest amount. Short-term loans offer lower total interest but will increase your monthly payments.
The current median home price is $427,179 and the 30-year fixed rate mortgage rate is at 6.7%.
If you take a 30-year loan, your monthly payment will be $2,205. By the time you pay off the loan, you will have paid $452,126 just in interest.
With a 15-year loan, your monthly payment will be $3,015. Since you are paying off the loan faster, the total interest will be much lower at $200,894.
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Types of Mortgage Loans: A Complete Overview
Want to dive deeper into interest rate comparisons? This detailed guide on Fixed vs Adjustable-Rate Mortgages helps you assess risk vs. stability over time.
There are several types of home loans available in the market. Choose the type of loan you need based on your income, monthly budget, future financial goals, and purpose.
Make a list of your requirements and then use this table to find your best fit:
Not sure whether to go for an FHA or conventional mortgage? FHA vs. Conventional Loans breaks down the pros and cons to help you pick the best fit based on credit score, down payment, and long-term goals.
| Loan Type | Description | Pros | Cons | Best For |
|---|---|---|---|---|
| Fixed-Rate Mortgages | Stable interest rates throughout the loan term, offering predictability. | - Stability and consistent payments. - Protection against rate increases. | - Higher initial interest compared to ARMs. - Less flexibility if rates drop. | Long-term planners who want predictability. |
| Adjustable-Rate Mortgages (ARMs) | Lower initial rates that adjust periodically based on market conditions. | - Lower initial rates. - Potential savings if rates decrease. | - Payments can increase unpredictably. - Higher costs if rates rise. | Buyers planning to sell or refinance soon. |
| FHA Loans | Government-backed loans with low down payment and flexible credit requirements. | - Low down payments. - Easier approval for moderate credit scores. | - Requires mortgage insurance premiums. - Loan limits may restrict home choices. | First-time buyers with moderate credit. |
| VA Loans | Loans exclusively for veterans and active-duty military, with no PMI or down payment. | - No down payment. - No private mortgage insurance. - Competitive interest rates. | - Limited to eligible veterans, active-duty members, and some spouses. - Property restrictions. | Veterans and active military personnel. |
| USDA Loans | Government-backed loans for rural and suburban buyers with no down payment required. | - No down payment. - Lower interest rates. - Benefits for rural buyers. | - Property must be in eligible areas. - Income limits apply. | Low-to-moderate income buyers in rural areas. |
| Jumbo Loans | Loans for high-value properties exceeding conforming limits. | - Enables purchase of luxury homes. - Flexible for unique property types. | - Requires strong credit and high income. - Higher interest rates and stricter terms. | Buyers of luxury or high-value properties. |
| Construction Loans | Short-term loans for financing home building, with funds disbursed in stages. | - Tailored for new builds. - Provides structured payments during construction. | - Higher interest rates. - Requires detailed building plans and inspections. | Buyers building custom homes. |
| Balloon Mortgages | Loans with low initial payments and a large lump sum due at the end. | - Lower monthly payments initially. - Useful for short-term financing. | - Risk of unaffordable lump sum. - Refinancing may be required at term-end. | Buyers planning to refinance or sell quickly. |
| Interest-Only Mortgages | Pay only interest for an initial period before principal payments begin. | - Low initial payments. - More cash flow flexibility in the short term. | - Higher long-term costs. - Builds no equity during the interest-only period. | Buyers with rising future income potential. |
Key Factors to Consider When Choosing a Mortgage Loan
Still unsure which loan is best for you? Consider these three key factors to move ahead in the selection process.
| Factor | Options | Pros | Cons |
|---|---|---|---|
| Loan Term | Short-Term vs. Long-Term Loans | - Short-Term: Lower interest overall. - Long-Term: Lower monthly payments. | - Short-Term: Higher monthly payments. - Long-Term: More interest paid over time. |
| Interest Rate Type | Fixed vs. Variable Rates | - Fixed: Predictable and stable payments. - Variable: Lower initial costs. | - Fixed: Higher initial rates. - Variable: Uncertainty if rates increase. |
| Credit Score | High vs. Low Credit Score Impact | - High: Lower rates and better terms. - Low: May qualify for FHA/USDA loans. | - High: Requires strong credit history. - Low: Higher rates and limited options. |
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Loan Eligibility and Application Process: FHA, Conventional, Jumbo, and VA Loans
Once you have selected the type of loan that suits your needs, it’s time to check your eligibility. Different loans will require you to prove your financial history, credit score, DTI ratio, income proof, etc. Each loan has its criteria. Let’s see the most common types of loans and their eligibility:
| Loan Type | Eligibility Criteria | Application Process |
|---|---|---|
| FHA Loans | - Minimum credit score of 580 (3.5% down) or 500 (10% down). | - Submit proof of income, employment, and credit history. - Provide W-2s, pay stubs, and tax returns. - Ensure property meets FHA safety standards. |
| - Debt-to-income (DTI) ratio below 43%. | - Choose an FHA-approved lender to guide you through the process. | |
| - Down payment of at least 3.5%. | ||
| Conventional Loans | - Credit score of 620 or higher. | - Complete a lender’s loan application online or in person. - Submit financial documentation (W-2s, bank statements, and tax returns). |
| - A DTI ratio below 36% is preferred (some lenders accept up to 50%). | - Provide property appraisal to ensure it meets value criteria. | |
| Jumbo Loans | - Credit score of 700 or higher, though some lenders may accept 680. | - Submit detailed financial documentation, including proof of significant assets and reserves. |
| - DTI ratio below 43%. | - Provide multiple years of tax returns, W-2s, and bank statements to verify financial stability. | |
| - Down payment of 10–20% depending on lender and loan amount. | - Ensure the property value meets jumbo loan requirements through a specialized appraisal. | |
| VA Loan | - Must be a veteran, active-duty military member, or eligible surviving spouse. | - Obtain a Certificate of Eligibility (COE) from the VA. |
| - The VA requires no minimum credit score (lenders often prefer 580+). | - Submit COE, income verification, and credit history to the lender. | |
| - No down payment is required in most cases. | - Provide a VA appraisal to confirm the home’s value and condition. |
How to Cut Costs?
Real estate continues to be a good investment in 2025. If you are set to purchase a property make sure you have a budget in mind. With mortgage rates set to remain above 6%, you need to find ways to cut costs through the sale process.
Smart buyers are heading to reAlpha to save 3% of buyer agent fees. On a median-priced home of $427,179, traditional agents charge 6%, costing you $25,631 in fees. By cutting just 3%, you save $12,815 instantly. This money can go towards buying a better property!
Mortgage rates may be high, but your buying costs don’t have to be.
With reAlpha’s AI-driven platform and expert support, buyers skip commissions, save thousands, and even get cashback at closing.
That’s money you can use to lower your monthly mortgage, upgrade to a better neighborhood, or offset closing costs.
FAQs
What are the 4 types of mortgage loans?
There are many types of mortgage loans available to real estate buyers. The four most common home loan types are a Conventional loan, a Jumbo loan, an FHA loan, and an Adjustable-rate mortgage.
What are the best mortgage loan options?
The best type of mortgage for you depends on your financial health, future goals, and property type. Fixed-rate mortgages are the most popular type of home loan. Since the interest rate is fixed you pay the same amount for the loan's lifetime.
Different types of mortgage loans for first-time buyers?
First-time home buyers may need assistance with a down payment or may have a less-than-perfect credit score. The government-backed FHA loans are probably their best option, allowing buyers with credit scores below 580 to purchase property with only a 3.5% down payment.
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Article by
Rocky Billore is a mortgage industry leader and Chief Sales Officer with over two decades of experience across residential and commercial lending. Since entering the industry in 2004, he has been directly involved in funding more than $1.4 billion in loans. A recognized expert in VA and government lending, Rocky combines deep program knowledge with a data driven, relationship-first leadership style. His work focuses on building scalable sales organizations, developing high performing teams, and aligning technology with real world lending outcomes to improve the homeownership experience.